Very Valuable Losses

Shrewd old Henry J. Kaiser and his son Edgar never put much of their own fortune into Kaiser Frazer Corp., their automobile manufacturing company which Edgar runs. Kaiser-Frazer lost some $52 million during its seven years of existence, and is $48.4 million in hock to the RFC. Old Henry put most of the family's millions into the highly profitable Kaiser Steel, Kaiser Aluminum & Chemical and Permanente Cement companies, controlled by his personal holding company, the Henry J. Kaiser Co.

But with RFC insistently pressing for payment, Old Henry Kaiser had to decide whether to let K-F go under or take the risk of propping it up with more of his own money.

Last week Kaiser took the risk. His personal holding company anted up $37.6 million in cash to enable a K-F subsidiary, Kaiser Manufacturing Co., to buy all the plants and equipment of Willys-Overland Motors for $62 million. If approved by Willys stockholders, as seems assured, the deal will be the biggest automobile merger since Chrysler bought Dodge for $170 million in 1928. In terms of assets, it will make the combine the fourth biggest U.S. motormaker.

Since Willys made big profits in 1952 (an estimated $24 million, cut by heavy taxes to about $6,500,000), most schoolchildren might have guessed that Willys would buy K-F, instead of the other way around. But in today's topsy-turvy, tax-ridden world, a big loss is a kind of asset because it can be "carried back" against profits over a five-year period. Thus, the driving motive in the merger is the fact that K-F can apply $31.2 million of its losses against future profits. Thus also, if Willys in 1953 should again make $24 million in profits before taxes, the new company could keep all of them, pay no taxes, and in a single year K-F could wipe out almost half of its seven-year losses.

On the other hand, Willys' hard-fisted Chairman Ward Canaday, 67, was willing to sell because, in spite of the fact that Willys has been able to build up big sales, largely from its jeeps, Canaday has never been able to pay a dividend on the common stock, of which he owns or controls 36%. Since the stock was selling at $5.25 only three years ago and the deal gives it a value of $17, Canaday and his co-owners (mainly his family) were more than willing to take a capital gain of $17.4 million on the deal. He is selling his plants, but not his company. Kaiser Manufacturing, which is changing its own name to Willys Motors, will operate the plants, while the original Willys-Overland Motors, having transformed its property into cash, will continue as an independent investment company. As with any other investment company, stockholders who want to redeem their stock will ultimately be able to cash it in for the $17 net asset value (nearly $2.50 more than its market price after the merger).

To get the RFC to okay the deal, K-F had to agree to pay off $15 million of its Government loan right away, plus annual instalments of $3,300,000. In 1959, the unpaid balance will be renegotiated as a new loan. To raise the money, the Kaisers floated a $20 million loan from the Bank of America and got Transamerica Corp. to put up another $15 million (in return for 150,000 shares of preferred in the new company). How much the deal boosted K-F's chances for success in the long run was anybody's guess. But it increased speculation that there might be new attempts to bring still other independents (e.g., Packard, Hudson, Nash, possibly Studebaker) into new mergers, in various possible combinations, to give the Big Three a better race for their money.

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